Residency Test in India – for Individuals

Taxation of a person depends on his residential status in the country.  Section 6 sub-section (1) of the Income Tax Act, 1961 provides the circumstances under which an INDIVIDUAL is said to be Resident in India.  Once the INDIVIDUAL is said to be resident in India, then we need to find out if he qualifies to be a ‘NOT ORDINARY RESIDENT’ under sub-section (6) of section 6.  This is because scope of total income for the purpose of taxation is different for RESIDENT, NOT ORDINARY RESIDENT and NON-RESIDENT.

The Finance Bill, 2020 introduced in India on Feb. 1, 2020, had a clause to tax “stateless” persons.  This led to a lot of confusion and therefore the MOF of the GOI, in its Press Release dated Feb. 2, 2020 clarified that:

In order to avoid any misinterpretation, it is clarified that in case of an Indian citizen who becomes deemed resident of India under this proposed provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession. Necessary clarification, if required, shall be incorporated in the relevant provision of the law.

The Finance Act, 2020 which received the Presidential assent on March 27, 2020, has addressed the issue.  These provisions are applicable from AY 2021-22.

Let us see the provisions of RESIDENT and NOT ORDINARY RESIDENT as existing before and after the amendment.

RESIDENT:

FOR AY:2020-21

A. An INDIVIDUAL is said to be RESIDENT IN INDIA if he is in India for 182 days or more during the previous year.

OR

B. An INDIVIDUAL is said to be RESIDENT IN INDIA if he is in India for 60 days or more during the previous year AND he is in India for 365 days or more in 4 preceding previous years.

OR

B-1.  Where a Citizen of India, leaves India, as a member of crew of Indian ship or for employment outside India – An INDIVIDUAL is said to be RESIDENT IN INDIA if he is in India for 182 days or more during the previous year AND he is in India for 365 days or more in 4 preceding previous years.

(For Citizen of India who leaves India, as a member of crew of foreign bound ship leaving India, the period entered into Continuous Discharge Certificate (CDC) as joining and signing off by the individual, of the eligible voyage which has either originating port or the destination port in India, is excluded, to determine the period of stay in India – Rule 126)

OR

B-2.  Where a Citizen of India, or PIO, visits India – An INDIVIDUAL is said to be RESIDENT IN INDIA if he is in India for 182 days or more during the previous year AND he is in India for 365 days or more in 4 preceding previous years.

OR

From AY: 2021-22

B-3.  Where a Citizen of India, or PIO, having Indian source income exceeding Rs. 15 lakhs during the previous year, visits India – An INDIVIDUAL is said to be RESIDENT IN INDIA if he is in India for 120 days or more during the previous year AND he is in India for 365 days or more in 4 preceding previous years.

C. DEEMED RESIDENT: (NO stay in India required.)

From AY: 2021-22

Individual Citizen of India having Indian source income exceeding Rs. 15 lakhs during the previous year, if not liable to tax outside India on account of his domicile, residence or similar criteria, shall be Deemed to be RESIDENT IN INDIA, for that previous year.

NOT ORDINARY RESIDENT:

FOR AY:2020-21

A. An INDIVIDUAL is said to be NOT ORDINARY RESIDENT IN INDIA if he is anNRI in 9 out of 10 previous years preceding that previous year.

OR

B. An INDIVIDUAL is said to be NOT ORDINARY RESIDENT IN INDIA if he is in India for 729 days or less during 7 preceding previous years.

OR

From AY: 2021-22

C. Where a Citizen of India, or PIO, having Indian source income exceeding Rs. 15 lakhs during the previous year, visits India – An INDIVIDUAL is said to be NOT ORDINARY RESIDENT IN INDIA if he is in India for 120 days or more but less than 182 days during the previous year.

OR

From AY: 2021-22

D. A Citizen of India issaid to be NOT ORDINARY RESIDENT IN INDIA if he is DEEMED RESIDENTas above.

A person who is not a RESIDENT is a NON-RESIDENT in India [section 2(30)]

Taxability of Total Income of an Individual in India, depends on his residential status under the Income Tax Act, 1961.

The following table depicts the taxability of an Individual: [Section 5]

Further once the income is taxed on accrual basis, the same shall not again be taxed on receipt basis.

Now let us see what is the income deemed to be received in India and income deemed to accrue or arise in India.

INCOME DEEMED TO BE RECEIVED IN INDIA:[Section 7]

(a) Contribution to recognised provident fund.

(b) Employer contribution to national pension scheme u/s 80CCD.

INCOME DEEMED TO ACCRUE OR ARISE IN INDIA:[Section 9]

(1) all income accruing or arising, whether directly or indirectly,

• through or from any business connection in India, or
• through or from any property in India, or
• through or from any asset or source of income in India, or
• through the transfer of a capital asset situate in India.

Except where a non-resident

• • purchases the goods in India for the purpose of Export.
  • not being a Citizen of India, from shooting of any cinematography film in India.

(2) “Salaries” earned in India.

(3) Dividend paid by an Indian company outside India.

(4) Interest, Royalty and Fees for technical services payable by Govt. of India

(5) Interest,Royalty and Fees for technical services payable by Resident of India except for debt utilised outside India or earning source outside India.

(6) Interest, Royalty and Fees for technical services payable by a non-resident on debt utilised in India or earning source in India.

(Note: This article depicts very broad structure for residency test and taxation for “INDIVIDUALS” in India under its tax provisions.  The views expressed are personal and need not necessarily be accepted by any tax authorities in any State. Readers are however advised to take legal opinion before concluding any specific transactions.)